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Cheap but flighty: A theory of safety-seeking capital flows

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  • Ahnert, Toni
  • Perotti, Enrico

Abstract

We offer a model of financial intermediaries as safe-asset providers in an international context. Investors from countries exposed to expropriation risk seek to invest in safe-haven countries in order to satisfy a demand for safety. Intermediaries compete for such cheap funding by carving out safe claims, which requires demandable debt. While these safety-seeking inflows allow developed countries to lower their funding cost and expand investment, risk-intolerant investors achieve safety by withdrawing even under minimal residual risk. As a result, safety-seeking inflows into developed countries not only reallocate but also create risk. Early liquidation inefficiently diverts scarce resources from productive uses, so a domestic planner wishes to contain the scale of safety-seeking inflows. A macroprudential regulator imposes a Pigouvian tax on safety-seeking inflows.

Suggested Citation

  • Ahnert, Toni & Perotti, Enrico, 2021. "Cheap but flighty: A theory of safety-seeking capital flows," Journal of Banking & Finance, Elsevier, vol. 131(C).
    • Handle: RePEc:eee:jbfina:v:131:y:2021:i:c:s0378426621001709
    DOI: 10.1016/j.jbankfin.2021.106211
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    Cited by:

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    2. Braun, Benjamin, 2021. "From exit to control: The structural power of finance under asset manager capitalism," SocArXiv 4uesc, Center for Open Science.
    3. Madalen Castells Jauregui & Dmitry Kuvshinov & Bjoern Richter & Victoria Vanasco, 2024. "Sectoral dynamics of safe assets in advanced economies," Economics Working Papers 1884, Department of Economics and Business, Universitat Pompeu Fabra.
    4. Aneta Bobenič Hintošová & Glória Bódy, 2023. "Sustainable FDI in the Digital Economy," Sustainability, MDPI, vol. 15(14), pages 1-15, July.
    5. Madalen Castells Jauregui & Dmitry Kuvshinov & Björn Richter & Victoria Vanasco, 2024. "Sectoral Dynamics of Safe Assets in Advanced Economies," Working Papers 1438, Barcelona School of Economics.
    6. Sini, Snow & Abdul-Rahim, A.S. & Chin, Lee & Said, Rusmawati & Sulaiman, Chindo, 2022. "Natural resources’ impact on capital flow and conflict relationship in Africa: A novel insight from GMM and quantile regression," Resources Policy, Elsevier, vol. 78(C).

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    More about this item

    Keywords

    Capital flows; Safe assets; Demandable debt; Unstable funding; Safe haven; Macroprudential regulation; Pigouvian tax;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • G01 - Financial Economics - - General - - - Financial Crises
    • G2 - Financial Economics - - Financial Institutions and Services

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